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  <h1>Contract design for pension schemes</h1>

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In designing the pension schemes, one must consider:
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  <li>
    The needs of pensioners
  </li>
  <li>
    The expenses asscociated with running the scheme.
  </li>
  <li>
    Whether to choose DB or DC plan.
  </li>
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    Why do employers provide pension schemes?
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      <ul>
        <li> paternalism
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        <li>a desire to attract and retain good quality employees ─ pension income can be thought of as deferred remuneration ─ by linking the benefit provided to the length of service, employees are encouraged to remain with the employer
        </li>
        <li> pooling pension arrangements for a large number of employees can create economies of scale and lower expenses
        </li>
      </ul>
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      One of the key requirements of good design is that they meet the
      needs of members, in particular with regard to:
      <ul>
        <li>
          a pension at retirement – how much depends on the extent of State provision
        </li>
        <li>
          death-in-service benefits – important for members with young families
        </li>
        <li>
          incapacity benefits – most important for onerous occupations
        </li>
        <li>
          medical expenses – how important depends on the quality of State provision
        </li>
        <li>
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    Expenses
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      However, as well as the cost of the benefits, the employer must
      also consider the expenses associated with setting up and running
      a pension scheme.
      <ul>
        <li>
          legal, actuarial and consultancy services
        </li>
        <li>
          investment expenses
        </li>
        <li>
          communication to members – members must be provided
          with full information on joining the scheme and with regular
          benefit statements thereafter
        </li>
        <li>
          compliance – with regard to regular actuarial valuations and accounting requirements
        </li>
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    Key features of defined benefit scheme
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        <li>
          members get defined benefits, based on formulae set out in
          the scheme rules
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        <li>
          employer bears risk of adverse experience (particularly with
          regard to investment and longevity) and, thus, future cost to
          employer is uncertain
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        <li>
          fixed expenses of running scheme are relatively high (as
          regular actuarial valuations are required, as well as other
          specialist expertise – e.g. legal, investment)
        </li>
        <li>
          final-salary schemes favour employees with high salary
          growth who remain in scheme until retirement
        </li>
        <li>
        </li>
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        Key features of defined contribution scheme
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              members get unpredictable benefits in retirement, and are subject to investment and annuity risk
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            <li>
              employer contribution is a defined percentage of salary
            </li>
            <li>
              fixed expenses of running scheme are low, but individual
              per-member expenses can be high (depending on
              investment strategy chosen)
            </li>
            <li>
              defined contribution schemes provide a more generous benefit to early leavers, and thus can be more flexible
            </li>
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  <p> Author: Mengke, Lyu</p>

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